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Asian Paints faces margin pressure in Q2

ICICIdirect Research 21 Oct 2022 DISCLAIMER

What's Buzzing 

Higher input cost, limited price hikes kept gross margins of Asian paints under check in Q2. 

Context 

Asian Paints reported ~19% revenue growth in Q2FY23 led by 10% volume growth. Continued demand from tier III & tier IV cities, market share gains and aggressive product launches drove the overall volume growth. However, realisation growth was limited at ~8% mainly due to change in product mix. The gross margin saw 200 bps correction QoQ to 36%, lower than its pre Covid level gross margin of 43%. This was largely due to adverse product mix and delay in price hikes. This, coupled with higher advertisement expenses dragged EBITDA margin by ~200 bps QoQ to 14.5%. PAT growth was, therefore, limited to 33% YoY to Rs 804 crore vs. Rs 973 crore estimated. 

Our perspective 

We believe, Asian Paints' Q2FY23 print was disappointing on the margin front. However, the company has maintained its double digit volume growth trajectory even on a higher base of last year. Going forward, we model volume CAGR of 14% in FY22-24E, supported by aggressive product launches and continuous expansion in the tier III, IV cities. On the margin front, we believe EBITDA margin will recover from Q3FY22 onwards supported by softening of raw material prices and improved product mix. Further, the company has announced Rs 6750 crore capex plan for the next three years to strengthen its backward integration and product portfolio. We believe the capex will help maintain its leadership position through market share gains and will be margin accretive. We maintain our positive stance on the stock factoring in Asian Paints' dominant position in the paint industry and limited damage to its margins from increasing competition.

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